| Sherwin-Williams: Will The Big Get Bigger? Feb-2022 (2021-Q3 data) |
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The Story
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| Sherwin-Williams is the largest paint and coating manufacturer in the world. We extrapolate its past 10-year growth into the future to determine its current value in this valuation. |
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The Assumptions
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| Base year | Years 1-4 | After year 5 | Link to story | |
| After-tax income growth | 19.11% | 2.50% | Grows year-after-year similar to the past 10 years with goodwill netted out from the acquisition costs. | |
| Reinvestment Rate | (12.85%) | 50.36% | 16.64% | Use the same reinvestment rate as the past 10 years aggregate with acquisitions taken into account. |
| Risk-free rate | 1.50% | 1.70%➡2.30% | 2.50% | Starts at 1.5% all the way to 2.5% in the terminal year. |
| Cost of Capital | 5.75%➡6.75% | 6.95% | Next year: Calculate from current year's financials. After that: Risk-free rate + Sherwin Williams' equity risk premium | |
| ROIC | 16.51% | 17.89%➡21.79% | 15.02% |
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The Cash Flows
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| After-tax EBIT | Reinvestment | FCFF | Cost of Capital | PV(FCFF) | Implied ROIC | |
| Base year (2021) | $2,478 | ($318) | 16.51% | |||
| 1 (2022) | $2,952 | $1,486 | $1,465 | 5.75% | $1,386 | 17.89% |
| 2 (2023) | $3,516 | $1,770 | $1,745 | 6.35% | $1,552 | 19.24% |
| 3 (2024) | $4,188 | $2,109 | $2,079 | 6.55% | $1,735 | 20.55% |
| 4 (2025) | $4,988 | $2,512 | $2,476 | 6.75% | $1,935 | 21.79% |
| 5 (2026) | $5,941 | $2,992 | $2,949 | 6.95% | $2,155 | 22.95% |
| Terminal year | $6,090 | $1,014 | $5,076 | 6.95% | 15.02% |
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The Value
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| Terminal cash flow | $5,076 | |
| Terminal cost of capital | 6.95% | |
| Terminal value | $113,943 | |
| PV (Terminal Value) | $83,268 | |
| PV (CF in high-growth period) | $8,763 | |
| Sum of PV | $92,030 | |
| - Adjustment for distress | $0 | Probability of failure: 0.00% |
| - Debt & Minority Interests | $12,636 | Based on Baa2 rating from Moody's |
| + Cash & Other Non-operating assets | $313 | |
| Value of equity | $79,708 | |
| - Value of equity options | $147 | |
| Number of shares | 262.20 million | |
| Value per share | $295.85 | Stock was trading at $280.51 |
In millions USD except Value-per-share.